Is your lender about to freeze your credit line? - The Finance Forums: Financial planning, debt help, loans, mortgages, retirement and 401k, investment, and general finance discussion forums

CraigTheLender · #1 (**permalink**) 01-16-2008, 09:46 PM

Word just in from one of our friends - a local Realtor in Fort Lauderdale, FL that could affect many people.

It seems not only are the banks and mortgage companies making it harder to get new loans, but they have started taking back access to equity lines they have already granted in light of declining property values.

I've mentioned in articles and in blog posts that lenders reserve the right to freeze a line of credit on property that has been damaged in the aftermath of a hurricane. If the lender's collateral is no longer there or is damaged, then they may not allow homeowners to access the available credit when a homeowner may need it most.

According to my friend, though, his line of credit was frozen due to a drop in property value - even though there is nothing wrong with the home.

We have said it countless times before - money in property is not the same thing as money in the bank. It may not be there to "withdraw" via a loan or line of credit when you need it most. Thankfully, our friend wasn't put in jeopardy by this situation, but there may be people who are using their line of credit as a savings "account" and have their money in the line of credit instead of the bank. If the bulk of someone's savings is suddenly trapped in their home, it could be devastating for them.

Right now, with the market in flux, the safest place to have your money is where you can get it easily - in the bank or some other account instead of your house. If you were planning on using money from an equity line of credit some time this year or next, you should really look at the option of taking it out of the property now. Perhaps using a larger first mortgage product - rates are very low right now on fixed rate loans. Just don't leave yourself at the mercy of bank policies that will be aimed at protecting their interest instead of yours.

Mynion · #2 (**permalink**) 01-16-2008, 10:08 PM

Craig, this is good information.

The same principle can be applied to many other type of financial services products, including some of the most popular savings vehicles used today.

Never underestimate not having access to your money when you may need it most.

Just another reason, other than pure economic reasons, why you should carry a big, long mortgage and keep as little of your money in your home as possible. Fact is, your property will rise (or, in this case, fall) in value regardless of the type of mortgage you have on it.

Emotionally, however, people feel more comfortable when their home is paid off. But emotional decisions are rarely ever good, sound financial decisions.

This is also a reason not to rely on an equity line as an emergency fund, as many financial planners in my area recommend.

Hermes · #3 (**permalink**) 01-17-2008, 09:35 AM

Mynion, I agree with you.

Emotional decisions when money is involved are set for failure. I always tell people to use thier home for what it was intended for...to live in it. Period. Nothing else but unfortunately there are many people who view their home as an ATM and create this feeling of wealth because they draw money as they wish. This is one reason why a home is the biggest illusion of wealth.

Home-ownership is great but if you use your home for other purposes it can turn ugly pretty fast.

I know people try to pay their home off but it makes no sense at all to rush and pay it off sooner and you will miss out on many opportunities if you tie up everything you have in your home.

tsdonnely · #4 (**permalink**) 03-26-2008, 07:28 AM

it seems so sensible and definitely within lender documents that mention this, but most borrowers are not aware... if people educate themselves and read more msg boards, articles, the newspaper, we wouldnt have so many people so confused...

jichino_11 · #5 (**permalink**) 05-16-2008, 06:14 PM

I noticed this after dealing with a local bank back when my family and i stayed in Louisiana during Katrina. But as the previous poster said, we didn't buy our home for the right reasons and it ended up causing us alot of headaches. My advice to people out there who plan on buying a home is to make sure you are financially stable before signing the dotted line.

terry16844 · #6 (**permalink**) 08-19-2008, 03:15 AM

most banks are freezing home equity lines if the home value has dropped and canceling inactive accounts. There making it harder to get home equity loans and mortgages.